EADSY

Surveying the Aerospace Arena

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The reasons for liking commercial aerospace, or constituents involved in the production of commercial aircraft, are many and varied. The liberalization of air travel between global point-to-point markets has facilitated expansion in not only leisure travel but also business travel between countries. The advent of the low-cost-carrier model in the likes of Southwest (LUV) and others just like it around the globe has made air travel affordable to those that it once had “priced out.” The growing middle class in developing countries has paved the foundation for continued passenger growth, something that should be expected for decades to come. The collapse in jet fuel costs has made the global airline industry, or those involved in the transporting of people from … Read more

Bellwether Snapshot: Walmart, Boeing, CSX

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Alcoa (AA) kicked off third-quarter earnings season with a wimper, which had been preceded by Yum! Brands’ (YUM) doozy of a showing. Incremental news impacting the expected performance of Walmart (WMT), Boeing (BA), and CSX (CSX) hasn’t been great either. Investors continue to write off weakness as “normal,” even “macroeconomic” as if it doesn’t matter, pointing to the transient nature of a struggling global economy suffering from a slowdown in the pace of growth in China and weakness in export-dependent countries, not the least of which is Brazil, as somehow a “good thing,” but it may not matter. The trajectory of expectations of future free cash flow generation is being impacted, and so are fair value estimates as a result, … Read more

Alcoa Disappoints in Third Quarter, China Weakness Prevalent

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Alcoa (AA) no longer is the industrial bellwether it once was as the global economy migrates more toward a service orientation, but the aluminum giant still has its hands in a lot of end markets. The company’s third-quarter results, released October 8, showed revenue falling 11% on a year-over-year basis, and modest net income of $0.07 per share, excluding special items. Acquisition and divestitures muddied the waters, but the general take was a negative one. The company is doing the best it can to migrate away from the volatility of its lower-margin operations, focusing its efforts on value-add operations, and while it is making progress, the company remains tied to the broader economic environment and the pricing pressures that inevitably … Read more

The Damage Has Already Been Done

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The Shanghai Index only fell another 1.3% yesterday. The US markets are cheering at the open Wednesday on hopes that last month’s July durable goods number is foretelling of what investors can expect after the latest leg down in the Chinese market and the collapse in US equity markets the past few weeks. Though “core” July durable goods orders were better than expected, pre-collapse data is no longer indicative of the true state of the US economy and what lies ahead, in our view. The Chinese government has gone “all-in” to prop up its bubbly market, one that is trading at 60 times reported earnings, but the impact, while arguably successful in preventing Armageddon in China for now, has only … Read more

Aerospace and Automotive Demand Powering Most Industrials

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Air travel growth and pent-up demand from delayed auto sales due to the Great Recession have provided a boom in spending within the commercial aerospace and automotive industries in recent years, respectively. The ever-increasing global population continues to be a driving force behind the expansion and adaptation of power end markets, and innovative solutions to meet growing global energy demand will continue to be a source of growth for industrials despite fluctuations in the energy-price markets. Such drivers in part have propelled the underlying performance of industrial giants GE (GE) and Honeywell (HON), among others. Winners and Losers Are Developing in Commercial Aerospace We expect commercial aircraft production and deliveries to continue to increase for at least the next three … Read more

Alcoa Kicks Off Fourth Quarter Earnings Season

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Would we ever considering owning Alcoa (AA) near a cyclical peak in economic demand, roughly 5-7 years into one of the strongest stock-market recoveries in history, or said differently, in the current environment? The short answer is: No. Market veterans know that the time to consider buying Alcoa is at a cyclical trough, not at peaks, and only then if there is no tangible risk of default. Alcoa may not be as much of an economic bellwether as it once was when the US was a much larger manufacturer of goods, but the aluminum giant is still relevant in assessing underlying demand trends in various end markets across the globe. The lightweight metal producer finds its way into just about … Read more

Gearing Up for 2015 Outlooks

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Though the firms below aren’t included in the newsletter portfolios, we keep a close eye on them should an opportunity ever present itself. Not only are they fantastic companies with strong business models, but they also provide insight into the broad industries in which they operate. With only a couple weeks left in 2014, management teams are actively preparing their budgets for 2015. Let’s have a look at what a few bellwethers have been saying about their outlooks for next year. Industrial Bellwether 3M (MMM)  The maker of Post-it notes has become the poster child of aggressive dividend growth policy as of late. Having traditionally raised its dividend a penny or two per year in the past, 3M upped the … Read more

Three Huge Red Flags for the Airlines, Hotels

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The airline industry is a good barometer of global economic activity as it not only gauges leisure travel but also business activity. We picked up three important red flags recently that may weigh on shares of the airline group (and by extension the hotel space). For those that don’t know us, we’re not at all fans of the investment prospects of the airline industry, but nonetheless, we pay very close attention to airlines for unique economic insights. Read about our recent call on cyclicals here, in case you missed it. 1. Ebola. According to CNN, the first case of Ebola has been diagnosed in the US. Just like the SARS and West Nile virus before it, the news will likely … Read more

There’s No Space Like Aerospace

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The recovery from the stock-market bottom in March 2009 has been five years in the making, but as the cyclical threat of an eventual global downturn looms, the aerospace industry is one of the few industries that we think will continue to be resilient in the face of such pressures. We expect commercial aircraft build rates to continue to climb at least through 2018. If the multi-year backlogs of unfulfilled deliveries at the large airframe makers aren’t enough, Boeing’s (BA) updated 20-year outlook for commercial aerospace demand, released June 10, was about as rosy as can be. The reason for such a long-range view has to do with the nature of aircraft building. When airframe makers build next-generation aircraft, they … Read more

Economic Commentary: Bank Earnings, US-China Phase One No Big Deal and More

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Bloomberg recently reported that U.S. banks’ record-breaking earnings have likely peaked for this cycle. We’ll get the team’s thoughts on this, and we’ll also cover views on the corporate credit cycle, China GDP, and the US election cycle. We don’t think the US-China Phase One deal amounts to much, other than removing the uncertainty that it, itself, created. Let’s kick things off with our views on a recent Bloomberg piece, U.S. Banks’ Record-Breaking Earnings Streak Has Probably Peaked, “which notes that “global interest rates remain stubbornly low and geopolitical tensions (remain) high.” Matt Warren is Valuentum’s Independent Bank and Economic contributor, and we’ll start there. Matthew Warren: The views expressed in the article seem a bit overly bearish assuming the … Read more